Utility stocks, generally seen as bond substitutes due to their stable dividends, have rallied significantly. Amid broader market uncertainty driven by geopolitical tensions, investors have turned to safer utility stocks.
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Utilities have outperformed broader markets over the past year, with the Utilities Select Sector SDPR ETF (XLU) returning 18% and the S&P 500 returning 11% (considering both capital appreciation and dividends).
Averaged over the last five years, utilities (IDU) have returned 10% compounded annually, in line with broader markets. Currently, utility stocks’ average dividend yield is 3.1%, higher than broader markets’ yields and the benchmark Treasury yields. Like dividend yields, dividend growth is a major driver of investors’ long-term returns.